The Santander 123 bank account has been my and this site’s top savings pick for four years. It pays 3% interest if you’ve £3,000 to £20,000 in it – smashing owt else for larger amounts.

Now there are reports that later in the year it is considering dropping the headline interest to 2%. So I wanted to bash out quick thoughts on the impact if it happens.

This story was broken by a leak to The Mail – and I understand it is correct. Santander has put contingency plans in place in case it does decide to do this. That isn’t the same as saying it’s definite though. It’s most likely to happen if the UK cuts base rates.

My suspicion is the reason it’s had to put plans in place early is because Santander 123 is not like a normal savings account. Its entire marketing, even its 1-2-3 name, dictates the rate. So it’d need a special plan and permission from the regulator, the FCA, to change it. So it’s far from definitely happening, but if UK rates are cut, it is certainly a plausible possibility during the latter part of this year.

What Santander 123 currently offers

There are two separate benefits of Santander 123. Yet for those it charges a fee, and back in January it increased this from £2 per month to £5 per month (so £24/yr to £60/yr) which made many unhappy, though as you’ll see from my Is Santander 123 worth it at £5/mth? analysis, for those with a decent whack of savings it’s still a clear winner. The benefits are…

Cashback on bills paid via the account. This can be a substantial amount – a fair proportion of people earn over £500 a year from it. It pays 1% on water, council tax and Santander mortgage payments (up to £10/month on the mortgage), 2% on gas, electricity and Santander home insurance and 3% on phone, broadband, mobile and TV.

But this only works if this is the account you pay all your bills from – so shift them to here. If you don’t pay bills (eg, parents do or partner does) and it’s not appropriate for them to be paid from your account, it’s far less attractive.

High interest on up to £20,000 savings (or £60,000 for a couple). It pays 3% interest if you’ve £3,000 to £20,000 in it. While other top bank accounts pay higher rates of interest – some up to 5% – the rest only do this on a maximum £5,000 in them (some far lower than that). The real gain from Santander is you can save far more at the top rate.

While 3% doesn’t sound much, in this day and age it’s more than double every normal savings account (the top payers are around 1.3%), and every easy-access cash ISA. Plus work it right (see how) and you and your partner can put £20,000 in an account each and then have a joint account – so that’s up to £60,000 shared as a couple.

To access the account, you’ll need to meet its terms, which is to put in £500/mth (though you can then withdraw it the next day) and have two direct debits set up. Full info on the eligibility terms in the Santander 123 write-up.

For most people the cashback at least covers the fee and often more and the interest rate it pays smacks the pants off everything else at larger values. So it’s an easy winner. With the full £20,000 in and decent cashback you could expect to get £700 a year from it. The same in top normal savings would pay £250.

Even if you didn’t earn any cashback (plausible for couples with three 123 accounts, as two of those mightn’t have big bills coming out of them), for basic-rate taxpayers it still beats everything else if you’ve got over roughly £8,000 in it.

This graphic shows how it works – ‘keep’ shows where it beats every other account, ‘ditch’ where other accounts beat it. The graphic’s a little inaccurate for savings below £4,000 as then other factors like cashback and free cash bonuses come into play, but it gives the general idea.

It is also worth noting too that last week Santander launched its new Santander 123 Lite account, which pays no savings interest, but does give the same cashback and only has a £1/mth fee. To see how that stacks up, see my Is Santander 123 Lite worth it? analysis.

If the rate changes what will happen?

I’m looking into a crystal ball here, so there’s some guesswork. I suspect the rate change is only one option. It could of course keep things as now, just up the fee – or change the tiers (ie, you’d need £10,000+ to get 3%). Yet let’s stick with the rate change and assume Santander will simply get rid of the 3% tier. That means with £2,000 to £20,000 in it you’d earn 2% interest – while the cashback and the fee stay the same.

Below is a chart of how the interest earnt in Santander 123 compares with other top current savings products.

As you can see, if it does it the way I’ve suggested, for larger amounts Santander 123 would still be a clear winner even at 2% interest and no cashback. If the cashback covered some or all of the fee as is likely, it wins by even more.

In fact I can take this a stage further. If you’ve got over roughly £12,500 in it, even without cashback it would still be a winner. And here’s my ‘ditch or keep’ graphic redone based on 2% interest. Again it’s a little inaccurate for savings below £4,000.

This comparison is likely unfair on Santander

I’ve compared Santander 123 at 2% interest with today’s top savings rates. Yet it’s most likely to drop its rate if UK base rates go down; if that happens other savings rates will likely fall too. So comparing it with current rates may not be fair.

More so as Santander 123 was the pioneer of high interest bank accounts: it tends to set the benchmark from which all others are measured and if it were to drop its rate, it is very likely we will see others drop too.

My suspicion is Santander 123 will remain as competitive in the future market as it is now (it’s been an enormous success for the bank – of course by drawing in new customers it gets to cross-sell them other products) – just the absolute returns people get will be lower, because of the low interest rate environment.Of course if this does happen, I will redo the analysis then with the exact details.

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